Djibouti, July 11, 2000

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

1. The attached Memorandum on Economic and Financial Policies spells out the Government of Djibouti's structural reform and macroeconomic adjustment program for 2000. It updates the Memorandum on Economic and Financial Policies attached to our letter sent to the IMF Managing Director on October 2, 1999, which covered the period July 1999—June 2002. Following slippages and delays in some reforms in 1999, the Government of Djibouti's put together corrective measures to bring the program back on track in 2000 and thereafter. In support of this program, the government requests waivers for all the performance criteria which could not be met at end-1999 and the completion of the first review under the Poverty Reduction and Growth Facility (PRGF) arrangement approved by the IMF Board on October 18, 1999. Accordingly, the government also requests the second disbursement under the PRGF arrangement of SDR 2.726 million.

2. The government believes that the policies set out in the attached memorandum will achieve the objectives of the program. However, it stands ready to take any additional measures appropriate for this purpose, and will consult periodically with the Fund—in accordance with the Fund's policies on such consultations—about the progress being made in implementation of the program and about any policy adaptations considered appropriate for the achievement of its objectives. The government will also provide the Fund with all information needed to assess progress in implementing policies and in achieving the objectives of the program.

3. The government's assessment is that its reform program will require external financial support in order to ensure its success.

4. The president has indicated to government ministries and agencies that their full cooperation in implementing the reform program will be required. He has also designated the ministry of finance and the National Bank of Djibouti to act as the coordinating agencies of the government in this collaborative effort. Our institutions are fully committed to continuing to fulfill these responsibilities.

5. The government appreciates the assistance provided by the IMF in formulating the economic reform program and looks forward to continued collaboration with the Fund in its reform endeavors.

Sincerely yours,

Memorandum On Economic And Financial Policies

1. In 1999, Djibouti's economy recorded GDP growth of approximately 1.5 percent. This growth was sustained by the sharp upturn in Djibouti's port operations (with tonnage exceeding 1998 levels by about 25 percent), largely reflecting increased transit trade with Ethiopia. This development more than offset the negative impact of the reduction in France's military presence. Based on the new consumer price index, introduced in April 1999, prices are estimated to have risen just 0.1 percent between 1998 and 1999.

2. The fiscal deficit of 2.1 percent of GDP in 1999 (on a commitment basis) exceeded the programmed deficit of 0.4 percent of GDP. This slippage reflected shortfalls in tax and nontax revenues as well as in external grants. In addition, expenditure overruns were recorded, particularly relating to the presidential elections. The shortfall in tax revenues primarily reflected the cutback in French forces and lower-than-expected revenues from the tax increase on jet fuel, while the shortfall in nontax revenues reflected the use of National Bank of Djibouti (BND) profits to liquidate a commercial bank rather than to support the budget. External financing fell short of program projections due to implementation delays in a number of projects financed by the World Bank and the African Development Bank (AfDB). Reflecting the weaker-than-projected fiscal position, domestic payments arrears increased by 1.6 percent of GDP, instead of declining by 1.2 percent of GDP as envisaged in the program.

3. In the monetary sector, bank deposits rose 6 percent in 1999 after an 11 percent rise in 1998, thereby fully unwinding the deposit decline seen during 1995–97. The proportion of deposits denominated in domestic currency also increased for the second successive year. Deposit expansion in 1999 was paralleled by a buildup of banks' net foreign assets, while domestic credit to the private sector expanded by only 4 percent (after a 15 percent increase in 1998). Reserve money, by contrast, continued to decline through 1999: after falling 4 percent between December 1998 and November 1999, currency demand surged briefly in December before falling again in the opening months of 2000.

4. The balance of payments recorded a modest overall surplus of US$1.8 million in 1999, compared to a programmed deficit of US$15 million. Contributing to this outcome, the current account deficit, estimated at about 3.5 percent of GDP (including grants) was lower than the programmed level of 6 percent of GDP. Unexpectedly strong growth in port and rail sector earnings more than compensated for the rise in merchandise imports, including, in particular, the purchase of cranes for the port. At the same time, the capital account (including errors and omissions) recorded a surplus of 3.8 percent of GDP, which was slightly larger than programmed. In this connection, delays in projects funded by the World Bank and the AfDB were offset by higher levels of private capital, including errors and omissions.

5. The improved balance of payments performance was reflected in larger-than-expected growth in the foreign assets of commercial banks. As a result, Djibouti's official financing need was broadly as programmed. Moreover, given the failure to conclude debt restructuring negotiations in 1999, Djibouti was unable to eliminate US$9 million of external payments arrears as anticipated, and accumulated new external payments arrears in the amount of US$11.5 million. The latter figure comprised not only obligations to bilateral creditors (subject to rescheduling), but also to multilateral creditors in the amount of US$0.5 million.

6. Performance criteria established under the program for end-December 1999 were observed for the net credit to the government by the BND and the commercial banks; the nonconcessional external borrowing of the government; and government borrowing from public enterprises. However, largely as a result of the developments described above, the criteria pertaining to the wage bill, stocks of domestic and external payments arrears, and net international reserves were not met.

7. Wage payments in excess of the program ceiling reflected unexpectedly large wage expenditures on the security forces (police and army), linked to the uncertain regional security situation. The ceiling on the nonconcessional external debt of public enterprises was exceeded on account of foreign-financed investments to upgrade the port, which has good prospects for generating foreign exchange earnings, particularly in the wake of the privatization agreement (see below). The overall weakness of the fiscal position was a factor in the failure to observe the ceilings on domestic payments arrears. In the case of external payments arrears, the program ceiling was exceeded largely because an agreement with Paris Club creditors was not concluded before end-1999 as had been programmed. The government intends to settle at the earliest possible date in 2000 its nonreschedulable arrears, primarily to bilateral creditors, but also to multilaterals. While falling short of program projections, net international reserves remained stable at a level significantly above that required under the currency board as coverage for base money. For these reasons—and on the basis of the corrective measures outlined below—which will be implemented before completion of the first review, and which are expected to facilitate the attainment of objectives very close to the original targets for 2000 (particularly in regard to fiscal performance)—the government requests a waiver in respect of the quantitative performance criteria that were not met.

8. Regarding structural reforms, a number of measures set forth in the matrix attached to the policy framework paper were implemented by end-1999. Some of these measures were performance criteria, such as the compilation of data on cross-arrears between public enterprises, government, and third-party suppliers, as well as the publication by the electricity and water companies (EDD and ONED) of their policies on implementing revenue collection reforms. The budget law also incorporated most of the structural measures envisaged in the program (see paragraph 12).

9. At the same time, however, Djibouti did not observe a number of structural performance criteria for end-December 1999. The budget for 2000 was not wholly consistent with the program objectives, as slippages in the 1999 fiscal position—which had implications for the 2000 budget projections—were not identified until late in the process, leaving insufficient time to develop and incorporate compensatory measures in the 2000 budget. In addition, a reform of the port tariff structure could not be implemented by end-1999 because an externally-financed study was completed later than envisaged (in late-1999). Accordingly, the timetable for introducing a new port tariff structure will be reviewed in light of the privatization of the port and in the context of the structural adjustment loan (SAL) scheduled for consideration by the World Bank's Executive Board during the latter half of 2000. Finally, the second stage of the demobilization program could not be completed as planned by end-1999 on account of security problems in the region. Reflecting these considerations, and in light of the strengthening of the program described below, the government also requests waivers for the structural performance criteria that were not observed at end-December 1999.

10. The government will extend and deepen its reform efforts in 2000 with a view to placing Djibouti's economy on a stronger growth path, raising per capita incomes, lowering unemployment, reducing poverty, ensuring domestic financial viability, and moving toward external viability. The government's macroeconomic objectives for 2000 include, inter alia, real GDP growth slightly in excess of 2 percent and limiting inflation to 2 percent. Structural reforms will be implemented in 2000 with a view to expediting attainment of the medium-term economic growth target. At the same time, the macroeconomic program will be underpinned by fiscal consolidation. The latter will be supported by reforms focusing on the structure of expenditure, aimed in particular at easing the fiscal burden imposed by the wage bill, together with administrative reforms designed to improve the management of public expenditure and boost the efficiency of tax collection.

11. The 2000 budget was consistent with a deficit (on a commitment basis) of 2.1 percent of GDP and a reduction in arrears of 1.4 percent of GDP, compared with program targets of a budget surplus of 0.7 percent of GDP and a reduction of arrears of 4.5 percent of GDP. Budgeted expenditures were slightly lower than programmed, with current expenditure of slightly less than 30 percent of GDP and capital expenditure of about 4.7 percent of GDP. Budgeted revenues also fell short of the program target by about 2.2 percent of GDP, while grants fell short by around 2 percent of GDP. The revenue shortfall reflected the continuing impact of shortfalls in 1999, for which there was no time to prepare adequate corrective measures in advance of the 2000 budget

12. The budget comprised a number of tax reforms, particularly as regards indirect taxation. The consumption tax (Taxe Intérieure de Consommation, or TIC) was simplified and reduced to three ad valorem rates of 8 percent, 20 percent, and 33 percent; furthermore, all specific rates were abolished except for those applicable to khat, alcohol, tobacco, and petroleum products. This simplification will improve the yield from the TIC. The surtaxes on petroleum products were reformed with the introduction of a specific duty (redevance) for each product, in addition to the surtax (which is likewise a specific tax). However, as explained below, these duties were scaled back sharply in early 2000 in an effort to offset the rise in world oil prices and maintain retail price stability. Tobacco taxation has also been increased, and the basis of assessment for certain registration taxes has been broadened (particularly the business license tax (patente) and tax stickers for cars). Finally, the last remaining tax on exports (applicable to livestock) was abolished. On the expenditure side, the recruitment of new government employees was strictly limited to the education and health sectors.

13. Djibouti has been directly affected by the civilian unrest in Somalia in recent years. This has not only created a sense of insecurity in the region, but has also resulted in waves of refugees. As a result, the Government of Djibouti has decided to sponsor negotiations among the various parties involved and organized in Djibouti in May 2000 a conference for peace in Somalia. This conference has been funded by private contributions, as well as through the imposition of additional excise taxes on khat, tobacco, and alcohol. All the funds thus collected have been deposited in a special off-budget account established specifically for this purpose.

14. Based on a review of budget projections in light of the results recorded in the early months of 2000, and to ensure that the budget deficit and arrears reduction figures for 2000 adhere as closely as possible to the initial program objectives, a supplementary budget was adopted on July 9, 2000. The objective is to achieve a small surplus of about 0.1 percent of GDP.

15. On the revenue side, the additional taxes on khat, tobacco, and alcohol in force since early 2000 (earmarked for funding the Somalia peace conference) will be integrated into budget revenue as of July 1, 2000. Effective May 21, 2000, the duties on petroleum products were increased to DF 32.1 per liter for gasoline, DF 18.2 per liter for diesel, and DF 7 for kerosene. (While these rates were subsequently reduced through July 2000, the short-run revenue losses will be modest and will be recouped before the end of the year (see paragraph 31).) Following a computerization drive and extensive field surveys, a more accurate determination of the tax base for salary and property taxes is resulting in higher yields than originally projected in the budget. The dividend to the state budget paid by the Port of Djibouti (PAID) is being increased by DF 375 million, in line with PAID's budget, and reflecting its expanded operations. The supplementary budget will also include additional receipts of about DF 330 million from the French army (Forces françaises de Djibouti) in the form of residential rental payments (pursuant to an agreement signed by Djibouti and France in early 1999). Furthermore, additional external grants from Italy and Japan—which will be in fungible form—have been identified and will raise the total amount of official grants to just over DF 8.4 billion (8.6 percent of GDP).

16. On the expenditure side, savings will be achieved through the following measures: accelerating the demobilization program, which in 2000 will include all personnel who were to have been demobilized in 1999; the retirement of approximately 40 civil servants effective June 1, 2000; cancellation of unused budget appropriations for expenditures on goods amounting to DF 180 million for the first quarter of 2000, coupled with a further reduction of such appropriations by DF 250 million for the remainder of 2000 (with the exception of the ministries of health and education); and a reduction in budget funding for scholarships, reflecting efforts to concentrate student studies in the more affordable countries.

17. This package of measures will serve to reduce overall budgetary arrears by about 3.6 percent of GDP in the course of 2000. The effort to reduce arrears will concentrate on the wage bill, but will also include government contributions to pension funds as well as payments to suppliers.

18. Following the sizable reduction in domestic budget arrears projected for 2000, the government intends to convert in early 2001 the bulk of its remaining arrears at end-2000—projected at DF 15.9 billion or 15.3 percent of GDP—into medium-term treasury bonds. As a preliminary step, the government has sought technical assistance from the European Union (EU) for an audit of the arrears claims. On the basis of a preliminary review conducted by EU consultants in March 2000, a comprehensive EU-financed audit of domestic arrears will be performed over a period of about three months before end-2000. Prior to the issuance of the treasury bonds, steps will be taken to clear cross-arrears with creditors with liabilities to the state. Furthermore, budget arrears to the pension funds will be reduced in the context of a pension fund reform financed under the proposed World Bank SAL.

19. On the basis of preliminary calculations, the government envisages that arrears would be exchanged for treasury bonds repayable in ten equal annual installments at a low (or zero) interest rate. On this basis, debt service on the bonds would amount to less than 2 percent of GDP per annum. The bonds will be negotiable to ensure that they have some degree of liquidity. Furthermore, in the event that additional budget resources were to be generated, early redemption of the bonds would be a priority for the government, to be carried out in accordance with procedures determined in advance. The government will give highest priority to ensuring that no new arrears are accumulated beyond 2001.

20. In view of the budget expenditure slippages in 1999, a sizable portion of which were not regularized until after the end of the fiscal year, the government will attach the utmost importance to improving the management and monitoring of government expenditure. A reform program addressing these issues has been prepared with the help of an IMF technical assistance mission. The key measures that the government is committed to implementing in 2000 and 2001 are summarized in Annex I.

21. Measures will also be introduced during the preparation of the 2001 budget to improve the budget process. In particular, guidelines will be sent to all ministries and agencies in early September outlining the macroeconomic framework and major budget parameters, including with respect to wages, the number of government employees and expenditures on goods and services. Furthermore, in the budget preparation process, closer attention than in the past will be paid to developments in the preceding fiscal year.

22. With respect to tax administration, individualized taxpayer identification numbers will be introduced prior to end-September 2000, which will help define the tax base. Furthermore, the tax assessment and collection offices will be consolidated within the Directorate of Tax Revenue as of January 1, 2001, for the TIC and in early 2002 for other taxes. A tax administration reform program will be prepared before end-2000 with the help of IMF technical assistance, and will be implemented beginning in 2001. Furthermore, the reform of the investment code—which will be a priority in the months ahead—will narrow the scope of exemptions from the TIC and other taxes.

23. The government remains committed to demobilizing the military personnel recruited in the early 1990s. On account of lingering regional tensions and the resulting uncertainties with respect to Djibouti's security, the demobilization in 1999 affected only 426 individuals, compared to an initial target of 1,648 individuals. However, given that the security problems affecting Djibouti have diminished somewhat, particularly in view of the February 2000 peace accord signed by the government and an armed opposition group, the government plans to demobilize 1,304 individuals in 2000 with financial assistance from the EU. Military personnel still on mobilization status at end-2000 (numbering approximately 3,000 individuals) will be demobilized over the period 2001-2002.

24. Reductions in civil service staffing levels, accompanied by strict controls over wages and benefits, will be the primary means of lowering the wage bill. The government intends to achieve reductions in staffing levels by introducing a program of staff retirement and voluntary separations. At present, this plan is hampered by the financial constraints facing the pension funds, which lack sufficient resources to pay for a large number of additional retirees. The government, in conjunction with World Bank staff, has agreed to establish a pension funds reform plan, which will be part of the World Bank SAL program. The main goals of the reforms will be to modify contribution and benefit parameters, and to normalize the financial relationships between the budget and the pension funds. These reforms will be agreed with the World Bank by end-2000. Once these reforms are in place, the government will implement a retirement plan (including early retirement) for employees and contractual personnel, affecting a total of about 640 individuals who have already reached retirement age. This plan will be implemented in its entirety by end-2001, assuming that the financial position of the pension funds is adequately strengthened.

25. With World Bank and IMF assistance, the government will make active efforts to identify external financing to pay for bonuses for demobilized personnel; programs for these individuals to assist them in returning to civilian life after they leave the armed forces; a portion of the costs of the pension funds reform; and severance payments for voluntary separations.

26. Many public enterprises have management, financial, and operating problems that prevent them from efficiently delivering the services they are required to provide. These troubled enterprises also place a burden on the government budget. The government believes that the only viable solution to these problems is to involve the private sector in the management of these firms.

27. In this context, the government and Dubai Ports International (DPI) signed on May 8, 2000, a contract for management of the port of Djibouti. The contract provides for a 20-year concession under which profits are to be shared by the Djibouti Government and DPI. This privatization operation was conducted more than 18 months prior to the date envisaged in the program. The process was expedited to take advantage of the improved relations between Djibouti and Ethiopia, and to meet the competition resulting from the expansion of other ports in the region. The goal will be to make Djibouti a gateway to East African markets.

28. In conjunction with the World Bank, the government will develop a strategy by end-2000 for the privatization of all other public enterprises; this plan will be put into effect beginning in 2001. In the interim, these enterprises will take steps to improve their financial position. The measures introduced by ONED at end-1999 include, inter alia, an automated monthly billing system, periodic audits of past payments, imposition of penalties on delinquent payers (including cutting off service), as well as technological measures to reduce illegal connections. These efforts have generated a 40 percent increase in the revenues collected during the first four months of 2000 compared to the same period in 1999.

29. The Société de télécommunications internationales de Djibouti will be liquidated by end-2000, and its international telecommunications operations and assets will be transferred to Djibouti Telecom (DT). DT will also be in charge of local telecommunications, which will be split off from the former Office des postes et télécommunications. The capital of DT, in which the government initially holds a majority stake, will be opened up to the private sector in 2001.

30. In August 1999, the government announced the total liberalization of the prices of petroleum products in Djibouti and, at the same time, the agency previously responsible for setting and monitoring prices, was dissolved. However, in practice, retail prices for petroleum products have remained stable since the announcement of the liberalization, despite the surge in world prices over this period. This stability was achieved by progressively reducing the taxation of petroleum products, in consultation with the companies importing and distributing these products. This contributed to a significant shortfall in fiscal revenues during the opening months of 2000.

31. To address these revenue losses, the effective tax rates on petroleum products were increased from May 21, 2000. At the same time, the government announced its commitment to price liberalization, and petroleum product retail prices rose by between 3 percent and 17 percent, leading to price increases also for bread and transport. This triggered considerable social unrest. As a result, and because the recent surge in world oil prices is expected to be short-lived, the government has temporarily offset the pass-through to the domestic market of higher world market prices for petroleum products by unwinding part of the May 2000 tax increase in July 2000. To safeguard the budget, the tax rates applied in August will be no lower than those applied from July 1, and the May tax increase will be fully restored from September 1, 2000, at the latest, regardless of developments in world market prices. Moreover, the government intends to recover revenue losses from this temporary tax reduction, which would be less than 0.1 percent of GDP, by raising tax rates above May levels as soon as world market prices permit. While these temporary tax reductions will provide some protection against higher petroleum product prices, the government is fully committed to liberalized retail prices, and will take no other steps to influence price developments. As a separate matter, the government introduced in January 2000 an exemption from the surtax on petroleum products for EDD to facilitate lower-rate tariffs for new tourism and fishing enterprises; this exemption will be limited to DF 100 million (0.1 percent of GDP) in 2000.

32. To contribute to the cost of maintaining the main road linking the port of Djibouti with Ethiopia, which is the route for the rapidly growing trade between the two countries, the government in 1999 introduced a road tax initially equivalent to US$1 per metric ton of load, earmarked for the Road Maintenance Fund and payable by trucks exiting the port. Following discussions with the Ethiopian Government regarding the compatibility of this tax with Djibouti's commitments under the Common Market for Eastern and Southern African, the tax rate was reduced to US$0.50 as of October 1999. The revenues from this tax collected by the Road Fund totaled DF 31 million through end-March 2000. Road Fund revenues will be used to cover the cost of maintaining the main road to Ethiopia and repaying loans contracted for the repair of this road.

33. A number of donors have committed to providing financial support for the efforts to repair the road link with Ethiopia, including France, the EU, the World Food Program (WFP), and the World Bank. With the exception of the World Bank's contribution, such financial aid will be in the form of grants.

34. To promote the integrity and efficiency of the banking sector in Djibouti, the banking law and the charter of the central bank have been reformed, with new laws adopted by parliament in June 2000. The authorities will work to address certain remaining issues in these laws at an early date and, consistent with Djibouti's currency board, the BND will continue to refrain from financing private sector non-financial projects. With the help of technical assistance from the IMF, the BND is continuing to strengthen its banking supervision capabilities, including in regard to on-site inspections. A supplementary training program for BND staff is being developed and will be implemented during the next 12 months.

35. Two commercial banks, the Al Baraka Bank and the Banque de Djibouti et du Moyen-Orient (BDMO), were placed in liquidation in 1998 and at end-1999, respectively. The recovery of these banks' debts and the gradual reimbursement of depositors are proceeding satisfactorily, if somewhat slower than anticipated owing to a number of judicial delays and other constraints. Liquidation of the Al Baraka Bank is scheduled to be completed by mid-2001, and the government also expects that the BDMO will be fully liquidated by that same date.

36. The operations of the Djibouti Development Bank (BDD), the only specialized bank in Djibouti, were frozen from 1996 owing to the growing number of nonperforming loans in its portfolio. Until that point, the government and the BND were hesitant to liquidate this bank because of the large number of small borrowers making up its customer base, who typically do not have access to loans from other commercial banks. As no other solution could be found, on February 15, 2000, the annual assembly of shareholders finally decided on the early dissolution of the BDD.

37. To promote access to credit for small- and medium-sized companies, the government has decided to authorize the creation of a Development Fund for Djibouti (FDD). The FDD's objective will be to grant direct loans, using its own funds and foreign borrowing, to private sector operators, especially in the tourism, fisheries, and agriculture sectors, with priority given to rural development and microcredits. Its mission will also be to provide technical assistance in project development. The FDD will not be able to take deposits from the public; instead, in addition to its equity capital, its financial base will consist of lines of credit from international or private national organizations. In terms of its financial structure, the government plans to hold a minority share in the capital of the FDD (as it does for one domestic commercial bank). The government's holding, which will not at any time rise above the initial level of 20–30 percent, will determine the government's share in the FDD's profits and losses and will be entirely financed by external concessional financing. Apart from this equity investment, neither the government nor the BND will provide direct financing to the FDD, and the government will not directly or indirectly guarantee lines of credit to the FDD or loans that it may grant. The FDD will fully publicize the private nature of its operations when it is created.

38. To improve Djibouti's competitiveness by creating optimal conditions for investment in the private sector, the government has initiated a reform of the labor code. The code, established some forty years ago under colonial rule, contained numerous clauses that were no longer fully compatible with the current economic and social context in Djibouti. In particular, the provisions on hiring and firing, leave, and wage determination were seen as potential obstacles to the development of private sector activity and employment. The government has provided a draft revised code to labor and employer representatives and plans to hold tripartite consultations with these representatives shortly. The government has received comments on the draft from employer organizations and will ask for ILO assistance in helping labor representatives with their evaluation. Following these consultations, the government will submit the final draft of the reformed labor code to Parliament by the end of 2000.

39. The government hopes to promote private investment by informing potential foreign investors of particular investment opportunities. In this context, several projects fully financed by the private sector without guarantees from the Government of Djibouti are being monitored by government departments. The government has also decided to contribute DF 350 million to a project for a cement factory costing approximately DF 4 billion. A private foreign investor will cover approximately 80 percent of the total cost of this project. The government will not give this project any specific advantages other than those indicated in the investment code, and will not provide any budget subsidies whatsoever during the life of this project.

40. To make the legal framework for investment more transparent, the government will promulgate a new investment code by end-2000. This code will consolidate and update the various texts adopted over the years to create a legal framework for investment. Only initial investment costs, and not current operating costs, will be exempted from taxes under the new code. Preparatory work was completed in early 2000 with technical assistance from USAID.

41. The government remains committed to pursuing economic policies that promote the competitiveness of the Djibouti economy. To this end, major structural reforms have been undertaken, as outlined in this memorandum. In particular, the recent concession contract for the management of Djibouti's port signed with DPI will be key. Other important projects include reduction of the state's role in the economy, as described above.

42. The government intends to pursue a prudent external borrowing policy and will continue to seek concessional financing. For 2000, the government has been able to identify additional external grants since the adoption of the budget law; these will be used to finance expenditure already included in the budget, with priority given to the social sectors. These grants include a grant from Italy in the amount of DF 220 million, a grant from Japan to purchase rice for resale at market prices, which will bring in approximately DF 215 million, and another grant from Japan in the amount of DF 215 million.

43. To ease the burden of public debt service, the government has asked the Paris Club to reschedule its debt on the most generous terms possible. In response, the Paris Club members have proposed the rescheduling, on standard terms, of arrears due as at October 31, 1999 and amounts falling due between November 1, 1999, and June 30, 2002, on medium- and long-term external debt contracted or guaranteed by the Government of Djibouti prior to March 31, 1998. The government has accepted the terms of reference transmitted by the secretariat of the Paris Club and will begin bilateral negotiations as quickly as possible with a view to signing bilateral agreements with all Paris Club creditors by end-2000. Moreover, the government undertakes to negotiate debt rescheduling agreements as soon as possible with all other creditors at terms comparable to the terms of reference transmitted by the Paris Club.

44. Poverty reduction is one of the government's highest priorities. The efforts already undertaken in this area will be stepped up. In particular, spending in the social sectors of education and health will be given priority, and these sectors will not be affected by any expenditure-reduction measures. Furthermore, expenditures on social safety nets, including the Social Fund and ADETIP, were increased in the 2000 budget.

45. In the assessment of the United Nations organizations (WFP, UNICEF, and UNFPA) and the Djibouti authorities, the drought that has afflicted the East Africa region for the last three years has affected about 150,000 people in Djibouti. The plight of the nomads has been exacerbated by the weakening of their livestock, essentially as a result of disease and the loss of vegetation. Approximately 10,000 metric tons of food aid is planned for 2000 and will be distributed in various regions, including the two refugee camps in the cities of Djibouti and Ali Sabieh. The total cost of this aid, including nonfood aid, is estimated at US$9.5 million and will be covered by grants organized by the WFP.

46. More broadly, the government will prepare an interim poverty reduction strategy paper, in collaboration with the World Bank and the IMF, in advance of the second review under the Poverty Reduction and Growth Facility (PRGF) arrangement. This document will provide a broad outline of the government's strategy and objectives for reducing poverty, taking account of the opinions of the most disadvantaged segments of the population in the context of a participatory process. It will also seek to coordinate the efforts of all donors committed to supporting the government's poverty reduction efforts.

47. Program implementation and monitoring will require an ongoing effort to improve Djibouti's economic and financial statistics. The government will take all necessary steps in this area and will seek technical assistance if necessary. The government will collect and submit to the IMF the data and information described in the technical memorandum of understanding.

48. Completion of the first review is conditional on implementation of the prior actions described in Table 1 (Annex II). The continued implementation of the program will be monitored with quantitative and structural performance criteria, as well as four other reviews. The continuous structural performance criteria and the criteria set for end-December 2000 are shown in Table 1.

49. Quantitative performance criteria have been set for end-July and end-December 2000, together with indicative targets for end-June and end-September 2000 (Table 2, Annex II). The performance criteria establish ceilings for the wage bill, stocks of domestic and external arrears, net credit to the government from the national bank and commercial banks, government borrowing from public enterprises, and nonconcessional foreign borrowing contracted or guaranteed by the government or public enterprises with initial maturities of more than one year. Quantitative floors will apply to the net international reserves of the BND.

50. Other performance criteria include an undertaking by the government not to impose restrictions on payments and transfers for current international transactions or increase existing restrictions, not to adopt multiple currency practices or modify multiple currency practices in effect, not to conclude bilateral payments agreements that conflict with Article VIII of the Articles of Agreement of the IMF, and not to impose import restrictions or increase existing restrictions for balance of payments reasons. Moreover, the ongoing performance criteria will apply to the accumulation of new domestic and external arrears (excluding external debt service arrears being rescheduled).

51. The second program review will cover the performance criteria and targets for end-July 2000. The discussions for the second review will focus in particular on the main parameters for the 2001 budget; the application of the policy of flexible petroleum products pricing; the progress in government expenditure management and fiscal monitoring; and the preparation of the interim poverty reduction strategy paper.

52. The third program review will cover the performance criteria and targets for end-December 2000. The discussions for the third review will focus in particular on the application of the 2001 budget; ongoing progress in managing government expenditure and fiscal monitoring; implementation of the reform to improve the management and efficiency of taxation; application of the plan to cut staffing in the civil service and reform the pension funds, subject to an agreement with the World Bank; and progress in defining a strategy for the privatization of public enterprises.

Main Measures for Improving Public Expenditure Management and Monitoring

The key measures of a reform program to improve the management and monitoring of public expenditure are as follows:

• Strict control of payments for which no prior payment orders have been issued, said practice being prohibited for all government ministries and departments, with the exception of embassies and spending agencies (régies de dépenses); all advances to the spending agencies will require payment orders and advances not be disbursed unless the previous advance has been fully justified (by end-June 2000).

• Monthly recording of all payments made without prior payment orders, covering all payments up to the previous month, and monthly regularization of any such payments made up to three months previously, so as to ensure effective monitoring of expenditure (by end-June 2000).

• Revenue collected by accountants or spending agents (régisseurs) will be fully repaid to the treasury and should under no circumstances be used to pay for expenditure (by end-June 2000).

• The introduction of a forward-looking cash-flow plan that is updated monthly and covers a rolling period of at least three months, and effective use of this tool to actively regulate public expenditure by making clear the commitment capacity as compared to the payment capacity (by end-June 2000).

• Computerization of payments in arrears and those paid to suspense accounts, as well as cross arrears between the government and public enterprises, covering all arrears or payments made since the beginning of 2000, and preparation of monthly statements covering the period up to the preceding month (by end-August 2000).

• Finalization of a master list of civil servants and government employees for the payroll, and a master list of the police and armed forces (by end-December 2000).

• Simplification and streamlining of the expenditure procedure (by end-June 2001).

• Preparation of new budgetary revenue and expenditure classification, and introduction of functional and economic classifications (by June 2001).

* * * * *

DJIBOUTI—TECHNICAL MEMORANDUM
OF UNDERSTANDING

This technical aide-mémoire contains details on: (1) the quantitative performance criteria, benchmarks, and targets shown in the annexes attached to the Memorandum on Economic and Financial Policies (MEFP); (2) basic information to be sent to the IMF through its resident mission; and (3) the plan for monitoring program implementation.

The aggregates on the basis of which ceilings are established are defined below. These aggregates cover the public sector wage bill; financing of the deficit by the central bank and the commercial banks and loans to public enterprises; the stock of cumulative arrears at end-1999 and of the new arrears accumulated from January 1, 2000, on the external and domestic debt; nonconcessional loans; and net international reserves.

The wage bill includes but is not limited to, all gross wages, salaries, indemnities, benefits, and allowances that the government agrees to pay to civilian, military, and security personnel (whether permanent or temporary), and all other employees of general government, regardless of the means of payment used (cash, check, or other instruments) or the paying agent (treasury or other entities acting on behalf of the government). The ceilings and targets exclude the costs and savings from the program for the demobilization of security and military personnel. The ceilings and targets include the savings for the projected retirements.

Domestic arrears include but are not limited to, arrears on the wage bill, to private suppliers and pension funds. The stock of domestic arrears relates to those outstanding at end of the period. New arrears include but not limited to delays in payment of wages and salaries for the period.

National Bank net credit to the government is defined as total claims of the National Bank on the government less all government deposits with the National Bank. These deposits include but are not limited to: the reserve fund; cash holdings of the treasury; and other deposits. Other deposits include but are not limited to: deposits in blocked accounts; deposits of exceptional external grants; current accounts; deposits in special accounts; and counterpart funds from loans and grants for external budgetary support. Deposits do not include counterpart funds generated from external loans and grants not intended for budgetary support.

Commercial bank net credit to the government is defined as total claims of commercial banks on the government (including overdrafts and securities and notes issued by the government and held by commercial banks) less all government deposits with commercial banks. Deposits include but are not limited to: deposits in blocked accounts; deposits of exceptional external grants; current accounts; deposits in special accounts; and counterpart funds from external loans and grants for budgetary support. Deposits exclude counterpart funds from external loans and grants not intended for budgetary support. The commercial banks consist of the three presently operating banks.

Borrowing from public enterprises is defined as all receipts that give rise to debt of the government to the enterprises. Borrowing includes but is not limited to: certificates of deposit; loans and advances; and deposits of public enterprises with the treasury. The coverage of public enterprises is defined to include all domestic nonfinancial enterprises (including partially owned), agencies, funds, and other non-central government entities.

Net international reserves are defined as gross international reserves less external liabilities and currency issue.

Gross international reserves are defined as the sum of sight deposits abroad; checks in process of collection from foreign entities; operations pending regularization; foreign exchange in cash; sight and time deposits of the treasury abroad; accounts with the IMF; SDR holdings and any reserve position in the IMF; and all other foreign assets. They are defined for this purpose, consistent with the definition of the SDDS template, as external assets readily available to, or controlled by, the central bank. Pledged or otherwise encumbered reserves assets including but not limited to reserves assets used as collateral or guarantee for third party external liability are to be excluded. Capital subscriptions to foreign financial institutions are excluded from gross international reserves.

External liabilities are defined as the sum of: external accounts having a credit position and all other foreign exchange liabilities (excluding use of IMF and AMF credit).

Currency board domestic liabilities are defined for program purposes as: Djibouti franc bills and coins in circulation (outside commercial and development banks and the treasury); cash held by commercial and development banks and the treasury; and deposits of commercial banks and the government at the National Bank.

New arrears and loans to enterprises: If the ceiling is zero and the performance criterion is constant, this means that there are no new arrears or loans at any time.

Nonconcessional external loans are defined as loans with a grant component of less than 35 percent. The rate of concessionality on loans is calculated on the basis of the 10-year average of the commercial interest reference rate (CIRR) published by the OECD for loans with maturities of more than 15 years and on the basis of the six-month average of the MIRR for loans with maturities of less than 15 years. They include financial leases and other instruments giving rise to external liabilities, contingent or otherwise, on nonconcessional terms.

For the purposes of calculating the criteria, the following exchange rates are to be used: US$1=DF 177.72; FF 1=DF 27.4; Euro 1=DF 175.9; SDR 1=DF 240.5.¹

The authorities will report to IMF staff each month, starting from June 2000, with a maximum lag of six weeks, save as otherwise indicated, through the resident mission, the following basic information:

Revenue: Breakdown of the total into revenue categories. Provide documents to support this breakdown: (1) statement of tax bills issued; (2) statement of collections; and (3) statement of balances outstanding.

Expenditure: Breakdown of the total by category: wage bill, materials and supplies, maintenance, domestic and external interest, transfers, and investment. For each category, provide the commitment, payment order, payment, and balance outstanding. Provide documents to support this breakdown: (1) statement of commitments, payment orders including statement for government, and special accounts; and (2) statement of budget outcome with detail of commitments, payment orders, payments, balances outstanding.

Bank financing, broken down into the central bank and commercial banks. This cumulative flow from January 1 of the current year to a specific date should be equal to the change between the stock at end-December 1999 and that date.

Domestic nonbank financing

External financing (commitments and disbursements), broken down into loans and grants. Provide documents to support this breakdown: (1) statement of project implementation; and (2) statement of external resources mobilization.

Cash flow plan, updated for the current month, and projection for the following month, based on the previous month's performance.

Tables on the position of the domestic arrears relating to: (1) the current year (2000); (2) the stock at the end of the previous year (1999); and (3) the consolidation of (1) and (2).

Tables on the position of the external arrears relating to: (1) the current year (2000); (2) the stock at the end of the previous year (1999); and (3) the consolidation of (1) and (2).

Monetary survey

Central bank statement

Commercial banks statement

Table for the computation of net international reserves

Table for the computation of the stock of central bank and commercial bank credit to the government

Flows of loans and grants accumulated from January 1, 2000, to the month preceding the current month.

Update of the stock of total debt, broken down into government debt and the debt of enterprises.

Update of the repayment schedule relating to total debt, broken down into the schedule for government debt and that for the debt of enterprises.

Operations relating to external debt other than those concerning the arrears mentioned above, and in particular: (1) debt recently contracted and guaranteed by the government and by public enterprises; and (2) the related new repayment schedule, incorporating the servicing of the debt in question with the stock of debt.

PIP implementation from January 1 to the month preceding the date on which the table is prepared

Price indices

Review of the structural reforms. Indicate the progress achieved, explain any deviations where applicable, and indicate the expected completion date.

Other details on major economic and social measures taken by the government that are expected to have an impact on program sequencing (such as changes in the legislation, regulations, or any other pertinent document) will be sent in a timely manner to IMF staff, for consultation or information.

For each quantitative performance criterion, benchmark, or target, provide the actual outcomes within six weeks following the end of the quarter just ended.

For the purposes of program monitoring, working meetings are planned, at least weekly, with the participation of representatives of the ministry of finance (budget, direct and indirect taxation, planning, and treasury directorates), the central bank, the Structural Adjustment Program (SAP) coordinator, and the resident representative. Items on the agenda of the weekly meetings include the reconciliation of financial operations recorded in the accounts at the treasury and the central bank, review of progress made in the implementation of structural measures, and discussions on any other topics that might have an impact on program implementation. These working meetings will facilitate the preparation, for every month, of tables on the consolidated operations of the government, the statement of domestic and external debt, the monetary survey, the updated cash flow plan, and progress made in the structural reforms. These tables are accompanied by an analysis comparing actual program performance with the projections and the implementation schedule, giving explanations for deviations, and proposing remedial measures. All of these documents are then forwarded to the minister of finance, the governor of the central bank, the interministerial committee for the coordination and monitoring of structural reforms, and IMF staff.